Effective July 1, 2014, the IRS implemented a new, streamlined application process for smaller organizations seeking tax-exempt status as under IRC section 501(c)(3) . Replacing the old, longer Form 1023, the new, shorter, and electronic Form 1023-EZ is the IRS’s solution to reduce the existing backlog of applications for tax-exemption. Although this will not affect every 501(c)(3) applicant, the IRS estimates that 70% of applicants will be able to use the Form 1023-EZ.
Who can file a Form 1023-EZ?
Filing a Form 1023-EZ is generally available for certain U.S. organizations with assets of $250,000 or less and annual gross receipts of $50,000 or less. However, there are several exceptions including schools, churches, and hospitals. For a full list of ineligible organizations, see IRS Revenue Procedure 2014-40.
How is it different from Form 1023?
One of the most obvious differences between the Form 1023 and the Form 1023-EZ is the length. The Form 1023 is 26 pages long and requires a written narrative, financial data, and various corporate governance documents including articles of incorporation, bylaws, a conflict of interest policy, and copies of contracts with officers, directors, and service providers. The 1023-EZ, on the other hand, is a 3 page long electronically filed form that requires only that the applicant check applicable boxes attesting that the applicant will comply with the rules governing 501(c)(3) organizations. This form does not require any additional documents, although, if necessary, the IRS may request more should they require it.
Another significant difference is the filing fees and the application turnaround time. The original Form 1023’s filing fee is $850 and a turnaround time between one to two years. In comparison, the filing fee for a Form 1023-EZ is $400 with a turnaround time of one to two months.
What does this mean for 501(c)(3) applicants?
The unfortunate truth is that it remains unclear how this new form will affect 501(c)(3) applicants.
Is there a chance that it may result in an increase in audits of smaller exempt organizations? Yes.
Is there a chance that it may result in an increase in fraudulent activity or people taking advantage of the system? Yes.
Some critics highlight the fact that this new, shorter form allows organizations to avoid learning essential rules like the exempt purpose test, the commerciality doctrine, and the private benefit and inurement rules. The IRS, on the other hand, sees this new form as a way to modernize and move forward, allowing them to properly screen applications and answers, targeting applications that are inconsistent or questionable. The IRS wants to shift focus from the front-end application process to the back-end audit process, seeing that as the most effective way to prevent fraudulent activity.
While the efficiency and effectiveness of this new application process is still unknown, the Form 1023-EZ is here, and likely, here to stay. At the least, here’s hoping it reduces the backlog!
The article provided above is for general information purposes only and should not be relied on as specific legal advice. This article does not form an attorney-client relationship. If you have any questions about this article, please feel free to contact Peter J. Smith at email@example.com
This article was authored by guest blogger Kelsey Ondrak, a 2L at Seattle University School of Law and summer associate at the Apex Law Group.